When Gov. Mark Dayton signed a $508 million tax-cut bill last month, it wasn’t only the middle class and businesses that got a break from the $1.2 billion budget surplus — Minnesota millionaires also received the largesse.
These taxpayers, collectively, saved $43 million from the repeal of the state’s gift tax and an estate tax reconfiguring. The gift tax died after just one year; millionaires can exclude twice as much of their estate (to $2 million, a jump from $1 million, phased in over five years).
But millionaires and their financial advisors want more, saying if they don’t get it, the “death tax” is more fuel for the move to low-tax states such as Florida, especially in the wake of rising income tax rates. The exodus of the wealthy and their much-sought charitable giving, they claim, continues, with negative consequences for Minnesota’s fabric of life.
State Revenue Department officials scoff, noting that seven of 10 estates that now pay the tax won’t in 2019. They argue “tax mobility” isn’t statistically significant, reducing state estate tax collections by a mere $13 million to $30 million annually — at most a couple-tenths of one percent of state revenues. It’s a small price to pay to retain what they call the “state’s most progressive tax.”
The price of non-conformity
This year, a Minnesota Senate bid to bump up the state’s exemption to match the federal level of $5.3 million failed. A $2 million exclusion, advisors contend, is simply too small to affect Sun Belt flight that accelerated when the state imposed a new a top individual income tax rate of 9.85 percent for married couples earning $250,000 or more and $150,000 for single filers in 2013.
“It’s really a battle over what ‘middle class’ is, and the state of Minnesota isn’t going along with Congress’ definition,” said Robert Abdo, an estate planning attorney and vice president of Lommen Abdo law firm.
“By not matching the federal estate tax, it just continues the conversation that Minnesota is going to find ways to keep raising revenues from the same core group of people,” added Ross Levin, president of Accredited Investors Inc.
In 2012, 2,043 estates filed Minnesota estate tax returns and 1,232 actually owed money, according the state revenue department. “The problem is the message that it sends,” Levin says.
Revenue Commissioner Myron Frans, however, questions whether such “tax migration” of the wealthy is anything approaching an epidemic. Frans notes that the vast majority will see significant tax savings by the time the changes are fully phased in by 2019 — no mean accomplishment for a state long characterized as unfriendly to the rich.
“Seventy percent of the estates that owed under the prior law will not owe under the new law,” Frans said, adding that it’s the first change to the provision in a decade.
A taxation dinosaur
Still, Minnesota is one of only 15 states that even has estate taxes on the books. Overall, it accounts for just 0.9 percent of the state’s total tax revenues; before the exemption was bumped up last month, the estate tax was forecast to raise $173.4 million in fiscal year 2014.
A $10M estate’s taxable portion (dark bar)
The estate tax is highly concentrated among a few Minnesotans. About half of the revenues have come from estates valued at $5 million or more, according to a March study from Frans’ department.
Raising the exemption to $2 million dings state coffers an estimated $63 million in FY 2015, $91 million in 2016 and $97 million in 2017.
Dayton framed the estate tax changes as a blow for simplifying how it has been imposed, which was indeed confusing and complicated. Because of a “rate bubble” left from an old federal law, a 41-percent tax was levied on approximately the first $100,000 of an estate above the exemption amount, with 9-16 percent levied on the remainder. Filers needed to calculate two tentative amounts, then pay the lesser the lesser of two.
This year’s changes wiped out the rate bubble — a move praised by nearly everyone. But because the exemption was raised to “just” $2 million, the benefits for the wealthiest Minnesotans will be negligible, and thus their incentives to leave have not been lessened, said Terry Slye, estate planning section chair of the Briggs and Morgan law firm.
“The way the rates and brackets work is if you’re in the $1 million-to-$2-million frame, you’ll get a fair amount of tax savings five years from now, but estates above that really won’t see any significant savings,” he said.
“My own experience is that if people are moving out of state more often that not, it’s the income tax, not the estate tax that maybe really is the driving force,” he added. “It depends person-by-person. But we certainly have seen in the last year or two a number of long-standing Minnesota clients who have either moved to Florida or announced plans to move to Florida and are in the process of doing that. It’s a concern.”
Frans, however, points to studies showing such “tax-induced mobility” has little significant effect on state revenues, estimating that such behavior has reduced estate tax collections between $13 million and $30 million per year.
“What we’ve done with doubling the estate tax exemption is really an important step for us as a state,” he said. “It’s a matter of simplicity and fairness. There’s this concern about how consistent we are with other states. There are only two states with estate taxes that match the federal exemption level (Delaware and Hawaii).”
Adds Frans, “The fact that people are complaining about what we didn’t do — as opposed to what we did do —is their prerogative, but we are actually quite proud of the significant reform we’ve accomplished this last year.”